Japan's recovery slow after sales-tax hike

TatsuoIto

TOKYO--Japan's consumer prices kept rising in July, with the inflation rate steady, but consumers and businesses were slow to shake off the hangover from the sales-tax increase in April.

Policy makers and market participants are keenly watching how swiftly the economy gets back on its feet after contracting sharply in the April-June quarter following the rise in the sales tax to 8% from 5%. Gross domestic product contracted an annualized 6.8% in the three-month period.

A slew of government data released Friday indicated consumers remained thrift-conscious and companies grappled with tepid demand and high inventories.

"While the inflation rate is steady, the pace of recovery in consumption and business activity is sluggish," said Takeshi Minami, chief economist at Norinchukin Research Institute.

The nationwide core consumer-price index rose 1.3% from the same month a year earlier after discounting the sales-tax increase. That matched the average forecast by economists polled by The Wall Street Journal.

The inflation rate is a key barometer of the success if Prime Minister Shinzo Abe's policies in ending deflation. The Bank of Japan is in the midst of a large-scale easing campaign to hit a 2.0% inflation target by early next year.

The aggressive drive by Mr. Abe and BOJ Gov. Haruhiko Kuroda to stamp out declining prices has helped the core CPI log solid on-year increases. But it has yet to hit the 2.0% mark, and has slowed since April.

If inflation stops falling or starts picking up again, it would likely douse speculation that the BOJ will take fresh measures to achieve its inflation target. Some private economists had been betting that if the CPI falls below 1.0%, the BOJ would be forced to act.

But Friday's data suggest such a scenario is now less likely.

"Unless major shocks occur or the economy falls into recession, it would be tough to breach the 1.0% mark in a short time span," said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management. "On the other hand, getting close to 2.0% also looks difficult," he added.

Meanwhile, after a sharp 3.4% fall in June, industrial output edged up 0.2% in July. This was much smaller than the 1.2% forecast, prompting the government to maintain its assessment that industrial production is trending on a "weak note."

Retail sales rose 0.5% in July from the same month a year earlier, the first on-year rise since the tax increase. But economists say it was a feeble rebound.

Household spending fell 5.9% from a year earlier in July, adjusted for price changes. That was much worse than economists' forecast of a 2.9% drop.

The BOJ predicts inflation will start picking up again in the second half of the current fiscal year as the labor market tightens and excess capacity diminishes.

But separate data indicated improvements in the labor market have come to a halt.

The jobless rate rose to 3.8% in July after hitting a multiyear low of 3.5% in May.

The jobs-to-applicant ratio was unchanged at 1.10, meaning there were 110 jobs available for 100 job seekers.

"This marked the first time since the launch of Abenomics that the index hasn't improved," said Marcel Thieliant, Japan economist at Capital Economics. The recovery in the labor market may soon have run its course, he added.

Takashi Nakamichi contributed to this article.

Write to Tatsuo Ito at tatsuo.ito@wsj.com and Mitsuru Obe at mitsuru.obe @wsj.com

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